Topic 1

Question 1

elements of an assurance engagement

Answer 1

Criteria- ISAs, IFRSs UK companies act 2006

Report- audit opinion = reasonable assurance expressed positively that the FS show a TF view
assurance conclusion, limited assurance, expressed negatively, ‘nothing has come to our attention’

Evidence:

• sufficient and appropriate
• audit: collect more work to give a higher level of assurance- do more work, reasonable, detailed testing
• assurance review/engagement: limited level of assurance standard of evidence required is lower (typically limited to analytical procedures and enquiries) LESS WORK
• Forecast: hard to obtain evidence as forward looking- can NEVER give reasonable assurance on forward looking events as evidence is subjective

Subject matter- type of document reporting on may be bespoke, may need to add caveats into report (actual events may vary from forecast) for forecasts

Three party relationship-

• FS primarily used by shareholders, are publicly available.
• other reports may have other users (banks) could be published or kept confidential

Question 2

contents of engagement letter

Answer 2

objective
scope
responsibilities of management
responsibilities of auditors
criteria 
content and form of report

Question 3

comparison between audit and assurance

Answer 3

Assurance = limited assurance, expressed negatively, ‘nothing has come to our attention.’

external audits = reasonable assurance, expressed positively, stating that in the auditors’ opinion the FS are ‘true and fair.’

A review or other assurance engagement = limited level of assurance = standard of evidence required is lower (typically limited to analytical procedures and enquiries).

An audit involves collecting MORE EVIDENCE in order to give a higher level of assurance.

Audits are required by law under the Companies Act.

Review engagements use ISREs and are optional.

Question 4

Benefits of assurance

Answer 4

increased CREDIBILITY over subject matter

may find deficiencies in subject matter

makes later audits/engagements easier

submitting work for scrutiny makes directors look better

will help business (assurance over FS increases chance of loan)

Question 5

Audit threshold

Answer 5

exempt from audit if not a PLC, bank, insurance company and 2 out of 3 are met:

no more than

10.2m turnover
5.1m balance sheet
50 employees

Question 6

responsibilities - engagement letter reduces expectations gap (210)

general,audit and internal controls and fraud

Answer 6

general:

directors - maintain accounting records, prepare FS, safeguard assets, comply with Sarbanes Oxley (only if parent is US)

Auditors- follow companies act 2006, set out terms (eng letter), follow ethical standards, perform quality control procedures

audit and internal controls:

director- prepare Fs, design internal controls to prevent, detect and correct errors and omissions (in whole business inc FS)

auditors - express opinion on FS, detect material errors, test int controls which adequately address audit risks (ie relate to FS), communicate weaknesses in internal controls to those charged with governance

Fraud (misrepresentation of assets or fraudulent FR) ISA 240

directors- prevent, detect and correct any instance of fraud

Auditors- detect material frauds in FS, NOT responsible for prevention of fraud, obtain a written representation from directors acknowledging their responsibilities, communicate any instances of fraud with:

1) management
2) those charged with gov
3) regulatory authorities

Question 7

responsibilities

laws and regulations

related parties

Money laundering

bribery

Answer 7

laws and regs ISA 250A:

directors: identify all relevant laws and regs and comply with them

auditors;

• consider any instances of non-compliance and whether they cause errors and omissions in the FS, e.g. provisions, impairments, fines, going concern basis.
• laws which directly impact FS (CA 2006), obtain sufficient and appropriate evidence
• other laws and regs (eg H&s)-enquiry of management and review correspondence files
• communicate issues with; 1) those with gov, 2) shareholders, 3) third parties

Related parties ISA 550:
directors: identify all related parties, disclose transactions

auditors: audit disclosures relating to related parties

going concern ISA 570;
directors- make assessment as to whether company is GC, prepare forecasts to provide evidence to support assumption
auditors- audit GC assumption, establish uncertainties relating to GC and audit disclosures

Money laundering:
directors : prevent ML in your org using internal controls, don’t do it
authorities: appoint MLRO, MLRO to report suspicions to NCA, provide staff with training on how to spot, perform client identification procedures, keep records , don’t tip off if you have suspicions

Bribery:

director: prevent bribery using internal controls
auditor: consider risks of non compliance (penalties) and report suspicions to NCA.